2021 outlook - a new beginning?

Leafing through the various outlooks for 2020, it was supposed to be a year where US elections, worsening trade tensions and Brexit were the dominating market forces. As usual, these foreseen forces were identified, authoritatively discussed and captured in print, video and podcast by the industry’s top soothsayers in time for the preceding Christmas holidays. No-one mentioned a pandemic of course, how could they? Hard proof of the planet’s shortage of credible seers has nonetheless done impressively little to dent appetites for 2021 predictions. Below we re-join the annual throng and have a go at some things to think about for investors for the year(s) ahead.

Trends

The endless scrabble to place the chaotic present into some form of wider context is surely understandable. Identifying in motion ‘trends’ often feels like a more intellectual and comforting alternative to astrology. For example, pandemics are now seen by many as a more regular part of the future[i], a function of our apparent entry into the Anthropocene era – a period when nature bites back. Such context is also deployed to make apparent sense of the endlessly surprising political context. For further credibility, socio-political mega trends are linked and causal relationships are (often precariously) established – inequality and populism for example. Any narrative that allows us to extrapolate a little perceived light onto that pitch black road ahead.

This is not to say that there is nothing to be gained in such attempts. We would be a pretty dull, incurious, bunch if we didn’t at least try. However, for investors the important message is really about putting such theories in appropriate context. If, for example, academics are still fighting tooth and claw over why this tiny island was the birthplace of the First Industrial Revolution a few hundred years ago, a genuine turning point in our species’ fortunes (Figure 1) – where does our confidence that we can instantaneously and accurately identify the major drivers of today’s investing context come from?

Some draw this confidence from what they see as the more glacial trends in demographics - gigantic forces apparently plucking and abrading the investing landscape ahead of us. For sure, how the proportion of people aged over 65 on this planet will evolve in years to come is likely more predictable than most strands of the future (Figure 2). But how important is even a sure grip here? Are we perhaps guilty of the inductive fallacy when we use this information to dictate our thoughts on future spending, healthcare and interest rate trends of 10, 20 or even 50 years hence? The parable of the blind men and the elephant is surely instructive here[ii]. Perhaps one of the many reverberations of this pandemic will be a surge in life expectancy as the cost benefit of vaccine and healthcare development is reassessed amidst the economic wreckage of this latest coronavirus. This year has surely taught us not to underestimate our potential to solve the problems we are faced with when accumulated scientific knowledge and expertise are urgently deployed. Or, on the other hand, perhaps the continuing bias towards expending large chunks of the world’s fiscal resources on the tools of war will continue and even accelerate. In either scenario (and many in-between), it is easy to see those who have leaned too heavily on current demographic forecasts for their investment direction looking overconfident.

Knowing something nobody else knows…

It gets worse. There’s no point in being right about a particular detail of the future (at company, index or asset class level) if everyone else is too. After all, this is a competition played by millions of full time participants trying to do exactly the same thing – fighting for basis points of extra performance (beyond that provided by the broad direction of the market) to gain a tiny performance edge over the competition on their clients behalf. The more obvious, the more logical the idea, the more likely it is that market pricing has already incorporated its appeal (or deficiencies) - it’s all very well identifying that cyber security is going to be a big thing…

The above may all seem like a fairly dispiriting exercise in reminding us of what we don’t know. However, that admission alone is vital for anyone serious about investing. This core truth is exactly why we don’t just organise our clients’ investment assets around a few key convictions. It is why the energy we save from avoiding the crystal ball, we are free to spend on arranging our multi-asset class portfolios and funds to be robust to myriad potential futures – not just the one that extends in a straight line from the last few months or years.

Turning point ahead?

If we’ve established a few of the things that we shouldn’t say with any confidence about the road ahead, what are some of the things we think we can say? We are usually resistant to the idea that we are living through what future historians might view as a genuine turning point. As we’ve pointed out before, such sentiment tends to owe more to a perhaps understandable desire to feel special rather than anything more objectively supportable. Genuine turning points, such as the First Industrial Revolution mentioned above, tend to be much rarer than widely imagined by editorial ink, with building blocks that can plausibly be traced through the preceding decades, even centuries.

Nonetheless, 2020 will surely reverberate. The various ways that policy makers responded to this crisis, the debt accrued by those responses (Figure 3) and the digital leap society reluctantly embraced in its midst cannot be easily forgotten. Hopefully, the sadly uneven access to education and healthcare exposed by the pandemic around the world will spur action to meet the words too.

The recovery from past pandemics has been marred by more conservative spending and saving decisions from consumers and businesses[iii]. Lower base line expectations for future trends in global growth and inflation are informed by this among other pre-existing theories. However, to position your investments for this future alone lacks imagination, humility and more besides. That truly unprecedented response from the world’s policymakers (owing much to the lessons clearly learnt from crises past) is just one factor suggesting that inflation is more of a risk now than it maybe was in the pre-crisis policy framework. Meanwhile productive technological breakthroughs have never been predictable, even if the apparatus with which we disseminate those technologies tend to be a little more so[iv]. The successful hunt for a vaccine for this latest coronavirus is just one part of a well stacked evidence locker when it comes to humankind’s productive potential.

Investment conclusion

2020 has been a terrible year. Years of death were brought forward by a pandemic that some foresaw from a distance, but none pinpointed precisely (obviously). For those souls that weren’t lost to us, there was plenty of torment in lockdowns, restricted lifestyles and the resulting economic turmoil. A reminder of mortality, fragility and more besides. However, 2020 was also a reminder of what can be achieved with accumulated scientific knowledge and technological advances when the incentives align. When alternative options were exhausted and there was no-one to fault, policymakers in Europe were able to take giant leaps forward in the euro project. It was a year we found some resilience in digital technology at the same time as finding some of its limitations – much of the human experience is simply not possible to replicate online. Trends in urbanisation that have survived through the sack of Rome to the cataclysms of world wars will surely survive this (Figure 4).

For investors, all of this is simply a reminder that you should be diversified for multiple futures whilst keeping in mind that 2020 provided enough fodder for the rational optimists too. Humankind remains hard to bet against over the longer term. The profits from our resilience, ingenuity and adaptability are exactly what you continue to be offered when you invest in one of our diversified funds or portfolios.

[i] https://adamtooze.com/2020/09/19/the-world-is-winning-and-losing-the-vaccine-race/

[ii] https://allpoetry.com/The-Blind-Man-And-The-Elephant

[iii] https://www.imf.org/external/pubs/ft/fandd/2020/06/pdf/long-term-economic-impact-of-pandemics-jorda.pdf

[iv] https://www.bankofengland.co.uk/-/media/boe/files/speech/2018/the-uks-productivity-problem-hub-no-spokes-speech-by-andy-haldane

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